Homework 3, Market Power
Dr. Leona
Williams a well known plastic surgeon, has a reputation for being one of the
best surgeons for reconstructive nose surgery. Dr. Williams enjoys a rather
substantial degree of market power in this market. She has estimated demand for
her work to be
Q = 480 – 0.2P
Where Q is the number
of nose operations performed monthly and P
is the price of a nose operation.
a.What is the inverse
demand function for Dr. Williams’s services?
b.What is the marginal
revenue function?
The average variable cost function for reconstructive nose
surgery is estimated to be
AVC = 2Q2 – 15Q + 400
where AVCis the
average variable cost (measured in dollars) and Qis the number of operations per month. The doctor’s fixed costs
each month are $8,000.
c.If the doctor wishes
to maximize her profit, how many nose operations should she perform each month?
d.What price should
Dr. Williams charge to perform a nose operation?
e. How
much profit does she earn each month?
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